FLOW INTERNATIONAL CORP - FORM 10-Q - March 12, 2013

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EXCEL - IDEA: XBRL DOCUMENT - FLOW INTERNATIONAL CORPFinancial_Report.xls
EX-31.2 - SECTION 302 CFO CERTIFICATION - FLOW INTERNATIONAL CORPflow-exx312_20130131xq3fy13.htm
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - FLOW INTERNATIONAL CORPflow-exx321_20130131xq3fy13.htm
EX-31.1 - SECTION 302 CFO CERTIFICATION - FLOW INTERNATIONAL CORPflow-exx311_20130131xq3fy13.htm
EX-99.1 - DEBT COVENANT COMPLIANCE - FLOW INTERNATIONAL CORPflow-exx991_20130131xq3fy13.htm

 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________
FORM 10-Q
____________________________________________

R
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2013
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________ to __________
Commission file number 001-34443
____________________________________________
FLOW INTERNATIONAL CORPORATION
____________________________________________

WASHINGTON
 
91-1104842
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
23500 64th Avenue South
Kent, Washington 98032
(253) 850-3500
____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer R
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 (Do not check if Smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R
The registrant had 48,423,308 shares of Common Stock, $0.01 par value per share, outstanding as of February 26, 2013.

 
 
 
 
 



FLOW INTERNATIONAL CORPORATION
INDEX
 
 
Page
 
 
 
 
 
 
 
Nine Months Ended January 31, 2013 and 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-31.1
 EX-31.2
 EX-32.1
 EX-99.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


2

PART I. FINANCIAL INFORMATION

Item 1.
Condensed Consolidated Financial Statements

FLOW INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par values)
(Unaudited)
 
January 31,
2013
 
April 30,
2012
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
12,539

 
$
12,942

Restricted Cash
78

 
1,435

Receivables, net
52,935

 
46,830

Inventories
40,138

 
40,069

Other Current Assets
18,023

 
14,269

Total Current Assets
123,713

 
115,545

Property and Equipment, net
17,949

 
17,488

Intangible Assets, net
5,067

 
4,936

Deferred Income Taxes, net
17,737

 
23,304

Other Long-Term Assets
5,589

 
5,793

Total Assets
$
170,055

 
$
167,066

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Subordinated Notes
$
10,305

 
$
—

Accounts Payable
19,057

 
22,577

Accrued Payroll and Related Liabilities
6,563

 
7,774

Taxes Payable and Other Accrued Taxes
2,386

 
3,735

Deferred Revenue and Customer Deposits
10,871

 
13,910

Other Accrued Liabilities
14,325

 
11,104

Total Current Liabilities
63,507

 
59,100

Deferred Income Taxes
5,963

 
5,777

Subordinated Notes
—

 
9,587

Other Long-Term Liabilities
1,651

 
1,554

Total Liabilities
71,121

 
76,018

 
 
 
 
Commitments and Contingencies

 

Shareholders’ Equity:
 
 
 
Series A 8% Convertible Preferred Stock, $.01 par value, 1,000 shares authorized; no shares issued and outstanding
—

 
—

Common Stock, $.01 par value, 84,000 shares authorized; 48,413 and 47,891 shares issued and outstanding
481

 
474

Capital in Excess of Par
166,388

 
164,882

Accumulated Deficit
(62,730
)
 
(69,672
)
Accumulated Other Comprehensive Loss:
 
 
 
Defined Benefit Plan Obligation, net of income tax
(81
)
 
(81
)
Cumulative Translation Adjustment, net of income tax
(5,124
)
 
(4,555
)
Total Shareholders’ Equity
98,934

 
91,048

Total Liabilities and Shareholders’ Equity
$
170,055

 
$
167,066

See Accompanying Notes to Condensed Consolidated Financial Statements

3

FLOW INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
January 31,
 
January 31,
 
2013
 
2012
 
2013
 
2012
Sales
$
67,658

 
$
65,808

 
$
200,931

 
$
190,371

Cost of Sales
41,005

 
39,737

 
124,065

 
115,864

Gross Margin
26,653

 
26,071

 
76,866

 
74,507

Operating Expenses:
 
 
 
 
 
 
 
Sales and Marketing
12,837

 
12,028

 
38,035

 
36,806

Research and Engineering
3,213

 
2,712

 
8,431

 
8,079

General and Administrative
5,818

 
5,342

 
17,417

 
17,312

Total Operating Expenses
21,868

 
20,082

 
63,883

 
62,197

Operating Income
4,785

 
5,989

 
12,983

 
12,310

Interest Income
10

 
12

 
77

 
61

Interest Expense
(297
)
 
(317
)
 
(962
)
 
(937
)
Other Expense, net
(252
)
 
(384
)
 
(641
)
 
(511
)
Income Before Income Taxes
4,246

 
5,300

 
11,457

 
10,923

Provision for Income Taxes
(1,551
)
 
(2,041
)
 
(4,380
)
 
(4,279
)
Income from Continuing Operations
2,695

 
3,259

 
7,077

 
6,644

Income (Loss) from Discontinued Operations, net of Income Tax
(84
)
 
57

 
(135
)
 
162

Net Income
$
2,611

 
$
3,316

 
$
6,942

 
$
6,806

 
 
 
 
 
 
 
 
Basic Earnings Per Share:
 
 
 
 
 
 
 
Continuing Operations
$
0.06

 
$
0.07

 
$
0.15

 
$
0.14

Discontinued Operations
(0.01
)
 
—

 
(0.01
)
 
—

Net Income
$
0.05

 
$
0.07

 
$
0.14

 
$
0.14

 
 
 
 
 
 
 
 
Diluted Earnings Per Share:
 
 
 
 
 
 
 
Continuing Operations
$
0.05

 
$
0.07

 
$
0.14

 
$
0.14

Discontinued Operations
—

 
—

 
—

 
—

Net Income
$
0.05

 
$
0.07

 
$
0.14

 
$
0.14

 
 
 
 
 
 
 
 
Weighted Average Shares Used in Computing Basic and Diluted Income Per Share:
Basic
48,413

 
47,857

 
48,273

 
47,730

Diluted
49,141

 
47,857

 
49,053

 
47,730

See Accompanying Notes to Condensed Consolidated Financial Statements

4

FLOW INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
January 31,
 
January 31,
 
2013
 
2012
 
2013
 
2012
Net Income
$
2,611

 
$
3,316

 
$
6,942

 
$
6,806

Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
Cumulative Translation Adjustment, net of tax
201

 
(326
)
 
(569
)
 
(1,203
)
Total Comprehensive Income
$
2,812

 
$
2,990

 
$
6,373

 
$
5,603

 
 
 
 
 
 
 
 
See Accompanying Notes to Condensed Consolidated Financial Statements



5

FLOW INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
Nine Months Ended
 
January 31,
 
2013
 
2012
Cash Flows from Operating Activities:
 
 
 
Net Income
$
6,942

 
$
6,806

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
 
 
 
Depreciation and Amortization
4,385

 
4,723

Deferred Income Taxes
3,981

 
2,437

Provision for Slow Moving and Obsolete Inventory
184

 
391

Bad Debt Expense
253

 
389

Warranty Expense
4,389

 
3,043

Incentive Stock Compensation Expense
1,976

 
1,783

Unrealized Foreign Exchange Currency Losses
332

 
367

Indemnification Charge
120

 
(162
)
Interest Accretion on Subordinated Notes
718

 
639

Other
41

 
37

Changes in Operating Assets and Liabilities:
 
 
 
Receivables
(7,067
)
 
(1,883
)
Inventories
(1,500
)
 
(7,129
)
Other Operating Assets
(1,400
)
 
(944
)
Accounts Payable
(2,835
)
 
(738
)
Accrued Payroll and Related Liabilities
(1,401
)
 
(733
)
Deferred Revenue and Customer Deposits
(2,931
)
 
1,328

Other Operating Liabilities
(3,106
)
 
(1,062
)
Net Cash Provided by Operating Activities
3,081

 
9,292

Cash Flows from Investing Activities:
 
 
 
Expenditures for Property and Equipment
(4,378
)
 
(2,849
)
Expenditures for Intangible Assets
(558
)
 
(497
)
Proceeds from Sale of Property and Equipment
223

 
36

Restricted Cash
1,317

 
502

Net Cash Used in Investing Activities
(3,396
)
 
(2,808
)
Cash Flows from Financing Activities:
 
 
 
Borrowings Under Credit Facility
37,990

 
45,750

Repayments Under Credit Facility
(37,990
)
 
(51,250
)
Borrowings (Repayments) Under Other Financing Arrangements
(2
)
 
27

Net Cash Used in Financing Activities
(2
)
 
(5,473
)
Effect of Changes in Exchange Rates
(86
)
 
78

Net Change in Cash And Cash Equivalents
(403
)
 
1,089

Cash and Cash Equivalents, Beginning of Period
12,942

 
9,096

Cash and Cash Equivalents, End of Period
$
12,539

 
$
10,185

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash Paid during the Period for:
 
 
 
Interest
$
159

 
$
261

Income Taxes
2,055

 
588

Supplemental Disclosures of Noncash Investing Activities:
 
 
 
Accounts Payable Incurred to Acquire Property and Equipment and Intangible Assets
$
457

 
$
338


See Accompanying Notes to Condensed Consolidated Financial Statements

6

FLOW INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
Accumulated
Other
Comprehensive
Loss
 
 
 
Common Stock
 
Capital
In Excess
of Par
 
 
 
 
Total
Shareholders'
Equity
 
 Shares
 
Par
Value
 
 
Accumulated
Deficit
 
 
Balances, April 30, 2011
47,378

 
$
469

 
$
161,741

 
$
(79,121
)
 
$
(3,635
)
 
$
79,454

Net Income

 

 

 
6,806

 

 
6,806

Other Comprehensive Loss, net of tax

 

 

 

 
(1,203
)
 
(1,203
)
Stock Compensation
481

 
5

 
1,532

 

 

 
1,537

Balances, January 31, 2012
47,859

 
$
474

 
$
163,273

 
$
(72,315
)
 
$
(4,838
)
 
$
86,594

 
 
 
 
 
 
 
 
 
 
 
 
Balances, April 30, 2012
47,891

 
$
474

 
$
164,882

 
$
(69,672
)
 
$
(4,636
)
 
$
91,048

Net Income

 

 

 
6,942

 

 
6,942

Other Comprehensive Loss, net of tax

 

 

 

 
(569
)
 
(569
)
Stock Compensation
522

 
7

 
1,506

 

 

 
1,513

Balances, January 31, 2013
48,413

 
$
481

 
$
166,388

 
$
(62,730
)
 
$
(5,205
)
 
$
98,934

See Accompanying Notes to Condensed Consolidated Financial Statements

7

FLOW INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All tabular dollar amounts in thousands, except per share amounts)
(Unaudited)

Note 1: Basis of Presentation
In the opinion of the management of Flow International Corporation (the “Company”), the accompanying unaudited condensed consolidated financial statements (“financial statements”) are prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) for interim financial information and rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures usually found in financial statements prepared in accordance with GAAP have been condensed or omitted. The unaudited financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals, which in the opinion of management are necessary to fairly state the financial position, results of operations and cash flows for the interim periods presented. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2012.
The preparation of these interim condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Company’s financial statements. Operating results for the three and nine months ended January 31, 2013 may not be indicative of future results.

Fair Value of Financial Instruments

The carrying value of the Company’s current assets and liabilities approximate fair values due to the short-term maturity of these assets and liabilities. Nonfinancial assets and liabilities measured on a nonrecurring basis that are included in the Company’s Condensed Consolidated Balance Sheets consist of long-lived assets and a cost-method investment. Such nonfinancial assets are measured at fair value when impairment indicators exist. Due to significant unobservable inputs, the fair value measures used to evaluate impairment and to calculate a prevailing market interest rate are Level 3 inputs. There were no impairments identified for the three and nine months ended January 31, 2013.

Note 2: Receivables, Net
Net receivables consisted of the following:
 
January 31, 2013
 
April 30, 2012
Trade Accounts Receivable
$
39,957

 
$
36,802

Unbilled Revenues
13,987

 
11,152

 
53,944

 
47,954

Less: Allowance for Doubtful Accounts
(1,009
)
 
(1,124
)
Receivables, net
$
52,935

 
$
46,830

Unbilled revenues do not contain any amounts which are expected to be collected after one year.

Note 3: Inventories

Inventories consisted of the following:
 
January 31, 2013
 
April 30, 2012
Raw Materials and Parts
$
26,258

 
$
26,247

Work in Process
2,706

 
3,313

Finished Goods
11,174

 
10,509

Inventories
$
40,138

 
$
40,069



8

Note 4: Debt

Subordinated Notes

The Company issued subordinated notes in fiscal year 2010 with a principal value of $10.0 million and a 2% annual interest rate. The notes were originally recorded at a discount as the stated interest rate was below the Company's incremental borrowing rate, and the discount is being amortized to interest expense through maturity of the notes. The principal balance and accrued interest on the notes will aggregate to $10.8 million when due in August 2013. As of January 31, 2013, the Company's subordinated notes and related interest of $10.3 million are classified as current.

Credit Facility

The Company has a $25.0 million Credit Facility that matures March 2, 2014. Under the terms of the Credit Facility in effect as of January 31, 2013, the Company was required to maintain a maximum consolidated leverage ratio of 2.75x, and a minimum fixed charge coverage ratio of 1.75x. The terms of the Credit Facility define the leverage ratio as the ratio of consolidated indebtedness, excluding its outstanding subordinated notes, to consolidated adjusted Earnings Before Interest, Taxes, Depreciation and Amortization and other non-cash charges, which includes such items as stock-based compensation expense, foreign currency gains or losses, and other allowable add backs pursuant to our Credit Facility Agreement ("Adjusted EBITDA") for the most recent four fiscal quarters. The Fixed Charge Coverage Ratio is defined as the ratio of Adjusted EBITDA, less cash payments for income taxes and maintenance capital expenditures, during the most recent four fiscal quarters to the sum of certain interest charges during the most recent four quarters and scheduled debt repayments in the next four quarters.

The financial covenants are measured on a quarterly basis. The Company's leverage ratio and fixed charge coverage ratio were 0.74 and 30.3, respectively as of the fiscal quarter ended January 31, 2013. The Company's calculations of these financial ratios are reported in Exhibit No. 99.1 of this quarterly report on Form 10-Q. A violation of any of the Credit Facility covenants would result in an event of default and accelerate the repayment of all unpaid principal and interest and the termination of any letters of credit. The Company was in compliance with all of its financial covenants as of January 31, 2013. All of the Company's domestic assets and certain interests in some foreign subsidiaries are pledged as collateral under the three-year Credit Facility Agreement. In addition, the terms of the Credit Facility limit the Company's ability to pay dividends.

Interest on the Credit Facility is based on the bank’s prime rate or LIBOR rate plus a percentage spread between 0.00% and 2.25% depending on whether it uses the bank’s prime rate or LIBOR rate and based on the Company’s current leverage ratio. The Company also pays an annual letter of credit fee ranging from 1.25% to 2.25% of the amount available to be drawn under each outstanding stand-by letter of credit. The annual letter of credit fee is payable quarterly in arrears and varies depending on the Company's leverage ratio.
 
There were no outstanding borrowings on the Company's Credit Facility as of January 31, 2013. Consequently, the Company had $16.9 million available under this Credit Facility, net of $8.1 million in outstanding letters of credit.

Revolving Credit Facility

The Company also maintains an unsecured credit facility in Taiwan for a total commitment of $1.4 million at January 31, 2013, bearing interest at 2.5%. There were no outstanding balances under the Company's unsecured Taiwan credit facility as of January 31, 2013.

9

Note 5: Commitments and Contingencies
Warranty Obligations
The Company believes that its warranty accrual as of January 31, 2013, which is included in the Other Accrued Liabilities line item in the Condensed Consolidated Balance Sheets, is sufficient to cover expected warranty costs. The following table presents the Company's warranty obligation activity:
 
Nine Months Ended
 
January 31,
 
2013
 
2012
Beginning Balance
$
3,013

 
$
2,804

Increase in warranty liability on fiscal year sales
4,389

 
3,043

Reduction in warranty liability for claims in fiscal year
(3,731
)
 
(2,884
)
Ending Balance
$
3,671

 
$
2,963


Legal Proceedings

At any time, the Company may be involved in legal proceedings arising in the normal course of conducting business. The Company's policy is to routinely assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is based on historical experience and an analysis of each known issue. The Company records reserves related to legal matters for which it is probable that a loss has been incurred and the range of such loss can be estimated. With respect to other matters, management has concluded that a loss is only reasonably possible or remote, or a range of loss cannot be estimated, and, therefore, no liability is recorded. Management discloses the facts regarding material matters assessed as reasonably possible, and the exposure if determinable. Costs incurred defending claims are expensed as incurred. Other than those described below, the Company does not believe that the resolution of any such matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows.

In litigation arising out of a June 2002 incident at a Crucible Metals (“Crucible”) facility, the Company's excess insurance carrier is contesting its obligation to provide coverage for property damage. The suits over insurance coverage, Flow Autoclave Systems, Inc., Flow Pressure Systems, ABB Pressure Systems, Avure Technologies AB and Avure Technologies, Inc. v. Lumbermens Mutual Casualty and Kemper Insurance Co., and Lumbermens Mutual Casualty Company v. Flow International Corporation, Flow Autoclave Systems, Inc., Flow Pressure Systems, ABB Pressure Systems, Avure Technologies AB and Avure Technologies, Inc., were originally filed in Supreme Court of the State of New York, County of Onondaga, Index No. 2005-2126 in 2005, and sought a declaratory judgment of the rights of the parties under the insurance policy issued by the carrier. The carrier, Lumbermens Mutual Casualty Company, has settled the claims relating to this incident for a total of approximately $3.4 million and is now seeking a declaratory judgment that it was not obligated to pay the claim. The suit, Lumbermens Mutual Casualty Company v. Flow International Corporation et al, was filed in United States District Court for the Northern District of New York on August 13, 2008, case number 08-CV-865. The trial has been postponed and no trial date is set. The Company is vigorously contesting the carrier's claim; however, the ultimate outcome or likelihood of this specific claim cannot be determined at this time and an unfavorable outcome ranging from $0 to $3.4 million is reasonably possible. The result of any outcome would be reported as discontinued operations in the Company's Condensed Consolidated Statements of Operations.

Other Claims or Assessments

In fiscal year 2009, the Company was notified by the purchaser of its Avure business (reported as a discontinued operation for the year ended April 30, 2006), that the Swedish Tax Authority was conducting an audit which included periods when the Company had owned the business. In the sale agreements, the Company made commitments to indemnify the purchaser for certain claims, including tax matters relating to the periods when it owned the business. The Swedish tax authority concluded its audit and issued a final report in November 2009 initially asserting that Avure owes 19.5 million Swedish Krona, approximately $2.8 million at the initial date of assessment, in additional taxes, penalties and fines. In April 2010, the Company, on behalf of Avure, filed an appeal to contest the Swedish tax authority's assertion. Since the filing of the Company's appeal, there has been a hearing before the Swedish district court regarding our appeal. In August 2012, the Company received notice that the Swedish district court issued a ruling in favor of the Swedish tax authority. The Company continues to contest the findings and filed an appeal with the Administrative Court of Stockholm in September 2012. A charge was recorded in the first quarter of fiscal year 2010 related to the periods when the Company owned Avure. This charge was accounted for as an

10

adjustment to the loss on the disposal of the Avure business and was reported as a charge to discontinued operations in the Company's Condensed Consolidated Statements of Operations. As of January 31, 2013, the Company has accrued $1.3 million related to the Avure matter. The balance of the accrued liability will fluctuate period over period with changes in foreign currency rates until such time as the matter is ultimately resolved.

Note 6: Shareholders' Equity

The Company maintains a stock-based compensation plan (the “2005 Plan”) which was adopted to attract and retain talented employees and promote the growth and success of the business by aligning long-term interests of employees with those of shareholders. Shares are issuable in the form of common stock, restricted stock, performance stock units, stock options, stock appreciation rights, or cash awards.

Stock Options

The following table summarizes stock option activities for the nine months ended January 31, 2013:
 
Number of Options
 
Weighted-Average Exercise Price
 
Aggregate Intrinsic Value
 
Weighted-Average Remaining Contractual Term (Years)
Outstanding at April 30, 2012
388,168

 
$
10.47

 
$
—

 
5.4
Granted
—

 
—

 
 
 
 
Exercised
—

 
—

 
 
 
 
Expired or forfeited
(13,140
)
 
5.71

 
 
 
 
Outstanding at January 31, 2013
375,028

 
$
10.64

 
$
—

 
4.8
Exercisable as of January 31, 2013
375,028

 
$
10.64

 
$
—

 
4.8
Vested and expected to vest as of January 31, 2013
375,028

 
$
10.64

 
$
—

 
4.8

The Company recognized compensation expense related to stock options of $0.2 million for the nine months ended January 31, 2012. There was no compensation expense recognized for options for the nine months ended January 31, 2013 and all outstanding options are vested.

Service and Performance-Based Stock Awards

The Company grants stock awards to employees of the Company with service and/or performance conditions, and it also grants stock awards to non-employee directors. Each non-employee director is eligible to receive and is granted fully vested common stock worth $40,000 annually. Performance-based stock awards are granted to executive officers and certain employees in management to align compensation with shareholder interests. Such awards generally vest over time; however, for certain awards, vesting occurs only when certain operating income targets are achieved. The compensation cost of the service-based common stock or restricted stock units are based on their fair value at the grant date and recognized ratably over the service period. The compensation cost of performance-based stock awards is measured based on their fair value at the grant date multiplied by the estimated percentage of performance stock units earned, and recognized ratably over the performance period.

The following table summarizes the service and performance-based stock award activities for employees for the nine months ended January 31, 2013:
 
Number of Shares
 
Weighted-Average Grant-date Fair Value
Nonvested at April 30, 2012
1,779,265

 
$
3.25

Granted
736,461

 
2.84

Vested
(574,248
)
 
3.17

Forfeited
(41,717
)
 
4.05

Nonvested at January 31, 2013
1,899,761

 
$
3.10


11


For the respective nine months ended January 31, 2013 and 2012, the Company recognized compensation expense related to service and performance-based stock awards of $2.0 million and $1.5 million. As of January 31, 2013, total unrecognized compensation cost related to service and performance-based stock awards of $4.4 million is expected to be recognized over a weighted average period of 2.5 years.

Note 7: Basic and Diluted Income per Share

Basic income per share is calculated by dividing income from continuing operations by the weighted average number of common shares outstanding during the period. Diluted income per share is calculated by dividing income from continuing operations by the weighted average number of common shares and potential common shares outstanding during the period. Potential dilutive common shares consist of the incremental common shares issuable upon the exercise of outstanding employee stock options and non-vested restricted stock units as determined under the treasury stock method, except where their inclusion would be antidilutive.

The following table sets forth the computation of basic and diluted income from continuing operations per share:
 
Three Months Ended
 
Nine Months Ended
 
January 31,
 
January 31,
 
2013
 
2012
 
2013
 
2012
Income from Continuing Operations
$
2,695

 
$
3,259

 
$
7,077

 
$
6,644

Weighted average shares used in computing basic income per share
48,413

 
47,857

 
48,273

 
47,730

Dilutive potential common shares from employee stock options and restricted stock units
728

 
—

 
780

 
—

Weighted average shares used in computing diluted income per share
49,141

 
47,857

 
49,053

 
47,730

Basic income from continuing operations per share
$
0.06

 
$
0.07

 
$
0.15

 
$
0.14

Diluted income from continuing operations per share
$
0.05

 
$
0.07

 
$
0.14

 
$
0.14


There were 0.4 million and 0.9 million potentially dilutive common shares from employee stock options and restricted stock units which were excluded from the diluted weighted average per share calculation for the respective three and nine months ended January 31, 2013 as compared to 0.5 million and 0.5 million antidilutive common shares from employee stock options and restricted stock units for the three and nine months ended January 31, 2012 as they were antidilutive.

Note 8: Other Expense, Net

The following table sets forth the detail of Other Expense, net:
 
Three Months Ended
 
Nine Months Ended
 
January 31,
 
January 31,
 
2013
 
2012
 
2013
 
2012
Realized Foreign Exchange Gains (Losses), net
$
24

 
$
(456
)
 
$
(216
)
 
$
(109
)
Unrealized Foreign Exchange Gains (Losses), net
(220
)
 
116

 
(332
)
 
(367
)
Other
(56
)
 
(44
)
 
(93
)
 
(35
)
Other Expense, net
$
(252
)
 
$
(384
)
 
$
(641
)
 
$
(511
)

Note 9: Income Taxes

For the respective three and nine months ended January 31, 2013, the Company recorded income tax expense of $1.6 million and $4.4 million compared to income tax expense of $2.0 million and $4.3 million in the comparative prior year periods.
The Company anticipates generating sufficient future taxable income to realize the benefits of its U.S. and certain of its foreign deferred tax assets while continuing to provide a full valuation allowance against its net operating losses and other net deferred tax assets in certain other foreign tax jurisdictions. The Company's valuation allowance was $7.6 million at January 31, 2013 and $7.9 million at April 30, 2012 and is mainly attributable to foreign net operating losses. Most of the foreign losses can be carried forward indefinitely, with certain amounts expiring between fiscal years 2016 and 2020.


12

As of January 31, 2013, the Company has not made a provision for U.S. or additional foreign withholding taxes for the excess of the financial reporting carrying value over the tax basis of investments in foreign subsidiaries with the exception of its subsidiaries in Taiwan and Switzerland for which it provides deferred taxes.


Note 10: Segment Information

The following table sets forth the revenue and gross margin of operations by reportable segment:
 
Three Months Ended
 
Nine Months Ended
 
January 31,
 
January 31,
 
2013
 
2012
 
2013
 
2012
Standard Segment:
 
 
 
 
 
 
 
Sales
$
62,579

 
$
59,076

 
$
187,798

 
$
171,267

Gross Margin
25,082

 
24,244

 
74,669

 
70,093

 
40
%
 
41
%
 
40
%
 
41
%
Advanced Segment:
 
 
 
 
 
 
 
Sales
5,079

 
6,732

 
13,133

 
19,104

Gross Margin
1,571

 
1,827

 
2,197

 
4,414

 
31
%
 
27
%
 
17
%
 
23
%
Total:
 
 
 
 
 
 
 
Sales
$
67,658

 
$
65,808

 
$
200,931

 
$
190,371

Gross Margin
$
26,653

 
$
26,071

 
$
76,866

 
$
74,507

 
39
%
 
40
%
 
38
%
 
39
%


13

FLOW INTERNATIONAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

     Forward-looking statements in this report, including without limitation, statements relating to our plans, strategies, objectives, expectations, intentions, and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “may,” “expect,” “believe,” “anticipate,” “estimate,” “plan” and similar expressions are intended to identify forward-looking statements. These statements are no guarantee of future performance and involve certain risks, assumptions, and uncertainties that are difficult to predict. Therefore, actual outcome and results may differ materially from what is expressed or forecasted in such forward-looking statements.

     We make forward-looking statements of our expectations which include but are not limited to the following examples:

•
statements regarding the effects of global financial and economic conditions, credit and equity market volatility and continued fluctuations in the global economy and the impact this may have on our business and financial condition;
•
statements regarding our belief that the diversity of our products and geographic presence along with the expansion of our indirect sales channel and our unmatched customer access will continue to minimize the impact that any one country or economy has on our consolidated results;
•
statements regarding our technological leadership position and our belief that our technological capabilities for developing products with superior characteristics provide us potential growth opportunities as well as a competitive advantage;
•
statements regarding our continued investments in lead generation, product enhancements, new product development and in our employees which we believe are critical to achieving our strategic objectives;
•
statements regarding our belief that we are well positioned to continue growing our business organically over the long-term by enhancing our product offerings and expanding our customer base through our global channels of distribution;
•
statements regarding the financial expectations for our new products;
•
statements regarding our ability to mitigate the risk of higher commodity and fuel prices;
•
statements regarding our belief that our channels of distribution are unparalleled in our industry and our ability to effectively manage them;
•
statements regarding our belief that the changes we have made in our Advanced segment, along with growing our revenue base, will enable us to maintain gross profit margins in a normal range of 25% plus or minus a few points, as well as meeting our customer requirements in this segment;
•
statements regarding our use of cash, cash needs, generation of cash through operations, and ability to raise capital and/or use our Credit Facility;
•
statements regarding our belief that our existing cash and cash equivalents, along with the expected proceeds from our operations and available amounts under our Credit Facility, will provide adequate liquidity to fund our operations through at least the next twelve months;
•
statements regarding our ability to fund future capital spending through cash from operations and/or from external financing;
•
statements regarding our ability to repay our subordinated notes;
•
statements regarding our ability to meet our debt covenants in future periods;
•
statements regarding anticipated results of potential or actual litigation; and
•
statements regarding the realizability of our deferred tax assets and our expectation that our unrecognized tax benefits will not change significantly within the next twelve months.

Certain other statements in Management’s Discussion and Analysis are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. Our ability to fully implement our strategies and achieve our objective may be influenced by a variety of factors, many of which are beyond our control. For a detailed discussion of risk factors affecting our business and operations, see Item 1A, Risk Factors in our fiscal year 2012 Form 10-K, and Item 1A, Risk Factors in our Quarterly Report on Form 10-Q for the quarter ended July 31, 2012, filed by us with the United States Securities and Exchange Commission on

14

August 30, 2012. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. These forward-looking statements should not be relied on as representing our estimates or views as of any subsequent date.

In this discussion and analysis, we discuss and explain our financial condition and results of operations, including:
•
Factors which might affect comparability of our results;
•
Our earnings and costs in the periods presented;
•
Changes in earnings and costs between periods;
•
Impact of these factors on our overall financial condition;
•
Expected future expenditures for capital projects; and
•
Expected sources of cash for future operations and capital expenditures.

As you read this discussion and analysis, refer to our Condensed Consolidated Statements of Operations included in Item 1 - Condensed Consolidated Financial Statements, which presents the results of our operations for the three and nine months ended January 31, 2013 and 2012. We analyze and explain the differences between the periods in the specific line items of our Condensed Consolidated Statements of Operations. This discussion and analysis has been organized as follows:
•
Executive Summary, including overview and future outlook;
•
Significant matters affecting comparability that are important to understanding the results of our operations and financial condition;
•
Results of operations beginning with an overview of our results, followed by a detailed review of those results by reporting segment;
•
Financial condition addressing liquidity position, sources and uses of cash, capital resources and requirements, commitments, and off-balance sheet arrangements; and
•
Critical accounting policies which require management’s most difficult, subjective or complex judgment.

Executive Summary

Overview
Flow is a global technology-based manufacturing company committed to providing a world class customer experience. We offer technology leadership and exceptional waterjet performance to a wide-ranging customer base. Our versatile technology benefits many cutting and surface preparation applications, delivering profitable waterjet solutions and dynamic business growth opportunities to our customers.

Third Quarter 2013 Highlights
During the third quarter of fiscal year 2013:
•
Overall revenues of $67.7 million for the three months ended January 31, 2013 represent another all-time quarterly high and a 3% increase from $65.8 million in the year-ago quarter. We have recorded sequential quarterly revenue growth in nine of the past ten quarters;
•
We continue to experience strong demand for consumable parts across most of our geographic markets with sales up 9% to $20.7 million over the year-ago quarter. For the quarter, our global spare parts business was lower as anticipated from the all-time high reported in the second quarter of fiscal year 2013 due to the impact of fewer selling days in the quarter;
•
Standard segment gross margins of 40% decreased moderately quarter-over-quarter and will vary period to period as a result of product and geographic mix. Our Advanced segment gross margins increased by 400 basis points to 31% compared to the year-ago quarter based on project mix;
•
We generated income from continuing operations of $2.7 million or earnings per share of $0.06 which compares to income from continuing operations of $3.3 million, or $0.07 per share in the comparative prior period;
•
Our consolidated adjusted earnings before interest, tax and depreciation (“Adjusted EBITDA”) was $6.9 million as compared to $8.1 million in the year-ago quarter. A reconciliation of Adjusted EBITDA to net income, which is the GAAP financial measure that is most directly comparable to our non-GAAP financial measure, is provided herein; and
•
We had a net cash position, which we define as cash and cash equivalents, less subordinated notes and any other debt, of $2.2 million as of January 31, 2013, which compares to a net cash position of $3.4 million as of April 30,

15

2012. We believe that future cash flows from operations and our borrowing capacity should provide adequate liquidity to fund our operations, to repay our subordinated notes and fund capital for planned growth.

Looking Ahead
We believe that we are well positioned to continue growing our business organically over the long-term through product development, unmatched customer access and continued operating leverage. Although other factors will likely impact us, including some that we do not foresee, we believe that our performance for the remainder of fiscal year 2013 and beyond may be affected by the following:
•
Economic Climate. The current economic environment continues to affect our business in a number of direct and indirect ways including: consumer demand for our products, differences in customer demand in the different geographic regions in which we operate; profit margins subject to pricing in the different geographic regions, sales mix due to differing products; changes in currency exchange rates; lack of credit availability; inflation; and business disruptions due to difficulties experienced by suppliers and customers.
•
New Products. We continue to make strategic investments in research and development for existing and new products, and to invest in research and development of advanced and innovative technologies for future application. We believe that delivering innovative and high-value solutions is critical to meeting customer needs and achieving our future growth. We remain positive with regard to our global introduction of our Mach 4 and Mach 2 series products and we anticipate stronger contributions from these products in the future.
•
Distribution Channels. We continue expanding both our direct and indirect distribution channels for broader geographic access to potential customers. We believe our current global network of sales agents and distributors are unparalleled in the industry.
•
Operations and Manufacturing. We continue to monitor commodity pricing to proactively mitigate the risk of changing commodity and fuel prices. We continue to pursue opportunities for streamlining our distribution, logistics and manufacturing operations, focus on improving inventory management, optimizing transportation costs, and providing a high level of service to our customers.
•
Advanced Segment. We continue to pursue new contracts and projects within this segment. Recently, new commitments for significant projects have been received and we continue to receive interest as companies expand production capabilities to include waterjets. In addition to securing future business, we have partnered with external resources with incremental capabilities to augment our internal resources. We believe that these changes, along with growing our revenue base, will enable us to maintain gross profit margins in a normal range of 25% plus or minus a few points, as well as meet our customer requirements.

Management remains focused on creating long-term shareholder value. We believe that Adjusted EBITDA, which we define as net income (loss), as determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”), excluding the effects of income taxes, depreciation, amortization of intangible assets, interest expense, and other non-cash charges, which includes such items as stock-based compensation expense, foreign currency gains or losses, and other allowable add backs pursuant to our Credit Facility Agreement, is a good measure of our core performance in creating this value. The following table reconciles our Adjusted EBITDA for the respective three and nine months ended January 31, 2013 and 2012:

Reconciliation of Adjusted EBITDA to Net Income: (in thousands)
Three Months Ended
 
Nine Months Ended
 
January 31,
 
January 31,
 
2013
 
2012
 
2013
 
2012
Net Income
$
2,611

 
$
3,316

 
$
6,942

 
$
6,806

Add Back:
 
 
 
 
 
 
 
Depreciation and Amortization
1,546

 
1,572

 
4,385

 
4,723

Income Tax Provision
1,551

 
2,041

 
4,380

 
4,279

Interest Charges
297

 
317

 
962

 
937

Non-Cash Charges (i)
942

 
868

 
2,637

 
2,092

Adjusted EBITDA
$
6,947

 
$
8,114

 
$
19,306

 
$
18,837

(i)
Represents allowable add backs pursuant to Credit Facility Agreement.

Adjusted EBITDA is a non-GAAP financial measure and the presentation of this non-GAAP financial measure is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. The items excluded from this non-GAAP financial measure are significant components of our financial statements and must be

16

considered in performing a comprehensive analysis of our overall financial results. We use this measure, together with our GAAP financial metrics, to assess our financial performance, allocate resources, evaluate our overall progress towards meeting our long-term financial objectives, and to assess compliance with our debt covenants. We believe that this non-GAAP financial measure is useful to investors and analysts in allowing for greater transparency with respect to the supplemental information used by us in our financial and operational decision making. Our calculation of Adjusted EBITDA may not be consistent with calculations of similar measures used by other companies.

Matters Affecting Comparability

Our financial performance over the past few years has been driven by several factors, principally the general economic conditions within our global markets, our product and project mix, the impact of strategic investments in our business, and fluctuations in the relationship of foreign currencies to the U.S. dollar. These key factors have impacted the comparability of our results of operations in the past and are likely to affect them in the future.

General Economic Conditions in our Global Markets
Our products and services are available worldwide. Demand for our products depends on the level of new capital investment and planned maintenance by our customers. The level of capital expenditures depends, in turn, on the general economic conditions within that market as well as access to capital at reasonable cost. Our financial performance will continue to be affected by our ability to address a variety of challenges and opportunities that are a consequence of our global operations, including efficiently utilizing our global channels of distribution, manufacturing capabilities, the expansion of market opportunities, and successfully engineering innovative new product applications for end users in a variety of geographic markets. However, we believe that our geographic end markets and product diversification has and will continue to minimize the impact that any one country or economy has on our consolidated results.

Product and Project Mix
Our profit margins vary in relation to the relative product and project mix, including the market segments that we serve, the type of product we sell, the geographic location in which the product is sold, the end market for which the product is designed, and the relative percentage of total revenue represented by our Standard systems, Advanced systems, and aftermarket sales.

Investments in Business
We believe that continued investment in lead generation, product enhancements, new product development and in our employees is critical to achieving our strategic objectives. Comparable period-over-period operating expenses will differ depending on the timing and magnitude of these investments. We expect that we will be able to leverage our overall operating expenses in future periods as our business continues to grow.

Currency Translation
The volatility in the global economic environment continues to result in significant volatility in the global currency markets. Since the majority of our international operations are conducted in currencies other than the U.S. dollar, currency fluctuations can have a significant impact on the translation of our international revenues and earnings into U.S. dollar amounts. During fiscal year 2013, the U.S. dollar has strengthened against the average exchange rates for these currencies versus the comparable prior year period, negatively impacting the translation of our international revenues and earnings during the current fiscal year.

In addition, some of our transactions that occur in our international locations are denominated in U.S. dollars, exposing them to exchange rate fluctuations when converted to their local currencies. These transactions include U.S. dollar denominated purchases of inventory and intercompany liabilities. Fluctuations in exchange rates can impact the profitability of our foreign operations and reported earnings and are largely dependent on the transaction timing and magnitude during the period that the currency fluctuates.


17

Results of Operations
(Tabular amounts in thousands)
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
January 31,
 
Increase (Decrease)
 
January 31,
 
Increase (Decrease)
 
 
2013
 
2012
 
$
 
%
 
2013
 
2012
 
$
 
%
 
Sales
$
67,658

 
$
65,808

 
$
1,850

 
3
 %
 
$
200,931

 
$
190,371

 
$
10,560

 
6
%
 
Gross Margin
26,653

 
26,071

 
582

 
2
 %
 
76,866

 
74,507

 
2,359

 
3
%
 
Selling, General, and Administrative Expenses
21,868

 
20,082

 
1,786

 
9
 %
 
63,883

 
62,197

 
1,686

 
3
%
 
Operating Income
4,785

 
5,989

 
(1,204
)
 
(20
)%
 
12,983

 
12,310

 
673

 
5
%
 
Expressed as a % of Sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Margin
39
%
 
40
%
 
 
 
(100
)
bpts
38
%
 
39
%
 
 
 
(100
)
bpts
Selling, General, and Administrative Expenses
32
%
 
31
%
 
 
 
100

bpts
32
%
 
33
%
 
 
 
(100
)
bpts
Operating Income
7
%
 
9
%
 
 
 
(200
)
bpts
6
%
 
6
%
 
 
 
—

bpts
_____________________
bpts = basis points
Consolidated Sales by Category
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
January 31,
 
Increase (Decrease)
 
January 31,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
 
2013
 
2012
 
$
 
%
Standard System Sales
$
41,859

 
$
40,071

 
$
1,788

 
4
 %
 
$
122,151

 
$
111,942

 
$
10,209

 
9
 %
Advanced System Sales
5,065

 
6,709

 
(1,644
)
 
(25
)%
 
12,970

 
18,971

 
(6,001
)
 
(32
)%
Consumable Parts Sales
20,734

 
19,028

 
1,706

 
9
 %
 
65,810

 
59,458

 
6,352

 
11
 %
 
$
67,658

 
$
65,808

 
$
1,850

 
3
 %
 
$
200,931

 
$
190,371

 
$
10,560

 
6
 %

Segment Results of Operations

We report our operating results to the chief operating decision maker based on market segments which are consistent with management’s long-term growth strategy. Our reportable segments are Standard and Advanced. The Standard segment includes sales and cost of sales related to our cutting, surface preparation and cleaning systems using ultrahigh-pressure water pumps as well as parts and services to sustain these installed systems. Systems included in this segment do not require significant custom configuration. The Advanced segment includes sales and cost of sales related to our complex aerospace and automation systems which require specific custom configuration and advanced features, including robotics, to match unique customer applications as well as parts and services to sustain these installed systems. Segment results are measured based on revenue growth and gross margin.

This section provides a comparison of sales and gross margin for each of our reportable segments for the respective three and nine months ended January 31, 2013 and 2012.
Standard Segment
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
January 31,
 
Increase (Decrease)
 
January 31,
 
Increase (Decrease)
 
 
2013
 
2012
 
$
 
%
 
2013
 
2012
 
$
 
%
 
Sales
$
62,579

 
$
59,076

 
$
3,503

 
6
%
 
$
187,798

 
$
171,267

 
$
16,531

 
10
%
 
% of total company sales
92
%
 
90
%
 
 NM

 
200

bpts
93
%
 
90
%
 
 NM

 
300

bpts
Gross Margin
25,082

 
24,244

 
838

 
3
%
 
74,669

 
70,093

 
4,576

 
7
%
 
Gross Margin as % of sales
40
%
 
41
%
 
 NM

 
(100
)
bpts
40
%
 
41
%
 
 NM

 
(100
)
bpts
_____________________
bpts = basis points
NM = not meaningful


18

For the three and nine months ended January 31, 2013:

Sales in our Standard segment increased $3.5 million or 6%, and $16.5 million or 10% over the prior year comparative periods. Excluding the impact of foreign currency changes, sales in the Standard segment increased $4.0 million or 7% and $21.1 million or 12% for the respective three and nine months ended January 31, 2013 when compared to the prior year comparative periods. The quarter-to-date and year-to-date increases were primarily due to the following:

•
Growth in system sales volume for certain of our geographic regions for aggregate growth of $1.8 million or 4% and $10.2 million or 9% over the prior year comparative periods; and
•
Consumable parts sales for this segment also increased $1.7 million or 9% and $6.3 million or 11% for the respective three and nine months ended January 31, 2013 over the prior year comparative period based on higher system utilization by our customers and increased system sales volumes across most of our regions.

Gross margin for the three and nine months ended January 31, 2013 amounted to $25.1 million or 40% and $74.7 million or 40% of sales compared to $24.2 million or 41% and $70.1 million and 41% of sales in the prior year comparative periods. Generally, comparison of gross margin rates will vary period over period based on changes in our product sales mix and prices, geographic mix and levels of production volume.
Advanced Segment
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
January 31,
 
Increase (Decrease)
 
January 31,
 
Increase (Decrease)
 
 
2013
 
2012
 
$
 
%
 
2013
 
2012
 
$
 
%
 
Sales
$
5,079

 
$
6,732

 
$
(1,653
)
 
(25
)%
 
$
13,133

 
$
19,104

 
$
(5,971
)
 
(31
)%
 
% of total company sales
8
%
 
10
%
 
 NM

 
(200
)
bpts
7
%
 
10
%
 
 NM

 
(300
)
bpts
Gross Margin
1,571

 
1,827

 
(256
)
 
(14
)%
 
2,197

 
4,414

 
(2,217
)
 
(50
)%
 
Gross Margin as % of sales
31
%
 
27
%
 
 NM

 
400

bpts
17
%
 
23
%
 
 NM

 
(600
)
bpts
_____________________
bpts = basis points
NM = not meaningful

Sales in the Advanced segment vary period over period for various reasons, such as the timing of contract awards, timing of project design and manufacturing schedules, the timing of shipments to customers, and installation timing.

For the three and nine months ended January 31, 2013, sales in our Advanced segment decreased by $1.7 million or 25% and $6.0 million or 31% over the prior year comparative periods. The decrease in sales was primarily driven by the timing of our Advanced contracts. Sales for the nine months ended January 31, 2013 also included the impact of a $0.7 million sales discount made to an existing customer.

Gross margin for the respective three and nine months ended January 31, 2013 amounted to $1.6 million or 31% and $2.2 million or 17% of sales as compared to $1.8 million and 27% and $4.4 million and 23% of sales in the prior year comparative periods. Gross margin as a percentage of sales in the Advanced segment was lower for the nine months ended January 31, 2013 in part due to the impact of lower throughput in our manufacturing plant in the first half of fiscal year 2013, as a result of the type of projects and the stages of the projects. Advanced segment gross margins will also vary period over period based on changes in product mix, geographic mix and levels of production.
Selling, General, and Administrative Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
January 31,
 
Increase (Decrease)
 
January 31,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
 
2013
 
2012
 
$
 
%
Sales and Marketing
$
12,837

 
$
12,028

 
$
809

 
7
%
 
$
38,035

 
$
36,806

 
$
1,229

 
3
%
Research and Engineering
3,213

 
2,712

 
501

 
18
%
 
8,431

 
8,079

 
352

 
4
%
General and Administrative
5,818

 
5,342

 
476

 
9
%
 
17,417

 
17,312

 
105

 
1
%
Total Operating Expenses
$
21,868

 
$
20,082

 
$
1,786

 
9
%
 
$
63,883

 
$
62,197

 
$
1,686

 
3
%

Consolidated operating expenses increased 9% and 3% for the respective three and nine months ended January 31, 2013 compared to the prior year comparative periods. The movement for the three months ended January 31, 2013 was primarily driven by higher relative labor and compensation related expense of $0.7 million, and increased marketing and related support expense of $0.5 million. Activity for the nine months ended January 31, 2013 included higher marketing and support expense of $1.8

19

million, and higher labor and compensation related expense of $0.8 million, offset by the benefit of a reimbursement for certain research and engineering costs of $0.8 million recorded in the first quarter of fiscal year 2013.

Interest Income (Expense), net
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
January 31,
 
Increase (Decrease)
 
January 31,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
 
2013
 
2012
 
$
 
%
Interest Income
$
10

 
$
12

 
$
(2
)
 
(17
)%
 
$
77

 
$
61

 
$
16

 
26
%
Interest Expense
(297
)
 
(317
)
 
(20
)
 
(6
)%
 
(962
)
 
(937
)
 
25

 
3
%
Net Interest Expense
$
(287
)
 
$
(305
)
 
$
(18
)
 
(6
)%
 
$
(885
)
 
$
(876
)
 
$
9

 
1
%

Our net interest expense was $0.3 million and $0.9 million for the respective three and the nine months ended January 31, 2013, in line with the prior year comparative periods with net interest expense of $0.3 million and $0.9 million. Our interest expense primarily consists of imputed interest on two subordinated notes that carry a below market interest rate, amortization of deferred debt financing fees and interest charges on the used and unused portion of our Credit Facility as well as outstanding letters of credit.

Other Expense, net
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
January 31,
 
Increase (Decrease)
 
January 31,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
 
2013
 
2012
 
$
 
%
Realized Foreign Exchange Gains (Losses), net
$
24

 
$
(456
)
 
$
480

 
NM

 
$
(216
)
 
$
(109
)
 
$
107

 
98
 %
Unrealized Foreign Exchange Losses, net
(220
)
 
116

 
(336
)
 
NM

 
(332
)
 
(367
)
 
(35
)
 
(10
)%
Other
(56
)
 
(44
)
 
12

 
27
 %
 
(93
)
 
(35
)
 
58

 
NM

Other Expense, net
$
(252
)
 
$
(384
)
 
$
(132
)
 
(34
)%
 
$
(641
)
 
$
(511
)
 
$
130

 
25
 %
_____________________
NM = not meaningful

During the three months ended January 31, 2013 net Other Expense was $0.3 million compared to $0.4 million for the three months ended January 31, 2012. For the nine months ended January 31, 2013 we recorded net Other Expense of $0.6 million compared to net Other Expense of $0.5 million in the prior year comparative period. In general, changes in this balance result from the fluctuation in realized and unrealized foreign exchange gains and losses on revaluation of third party and intercompany settled and unsettled balances for which payment is anticipated in the foreseeable future.

Income Taxes

Our provision for income taxes for the respective three and nine months ended January 31, 2013 and 2012 consisted of:
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
January 31,
 
Increase (Decrease)
 
January 31,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
 
2013
 
2012
 
$
 
%
Current Tax Expense
$
229

 
$
808

 
$
(579
)
 
(72
)%
 
$
746

 
$
1,754

 
$
(1,008
)
 
(57
)%
Deferred Tax Expense
1,322

 
1,233

 
89

 
7
 %
 
3,634

 
2,525

 
1,109

 
44
 %
Total Tax Expense
$
1,551

 
$
2,041

 
$
(490
)
 
(24
)%
 
$
4,380

 
$
4,279

 
$
101

 
2
 %

For the respective three and nine months ended January 31, 2013, we recorded income tax expense of $1.6 million and $4.4 million compared to income tax expense of $2.0 million and $4.3 million in the same period last year.

We anticipate generating sufficient future taxable income to realize the benefits of our U.S. and certain of our foreign deferred tax assets while continuing to provide a full valuation allowance against our net operating losses and other net deferred tax assets in certain other foreign tax jurisdictions. Our valuation allowance was $7.6 million at January 31, 2013 and $7.9 million at April 30, 2012 and is mainly attributable to foreign net operating losses. Most of the foreign losses can be carried forward indefinitely, with certain amounts expiring between fiscal years 2016 and 2020.


20

As of January 31, 2013, we have not made a provision for U.S. or additional foreign withholding taxes for the excess of the financial reporting carrying value over the tax basis of investments in foreign subsidiaries with the exception of our subsidiaries in Taiwan and Switzerland for which we provide deferred taxes.

Liquidity and Capital Resources
Sources of Cash
Historically, our most significant sources of financing have been funds generated by operating activities, available cash and cash equivalents and available lines of credit. From time to time, we have raised funds through the sale of common stock.

Cash from Operating Activities
Cash generated by operating activities was $3.1 million and $9.3 million for the nine months ended January 31, 2013 and January 31, 2012, respectively. The change in cash from operations versus the prior year comparative period was driven by the third quarter timing of sales and customer billings as well as timing of vendor payments and customer deposits.

Available Cash and Cash Equivalents
At January 31, 2013, we had total cash and cash equivalents of $12.5 million, of which $7.6 million was held by our foreign subsidiaries. To the extent that our cash needs in the U.S. exceed our cash reserves and availability under our Credit Facility Agreement, we may repatriate cash from certain of our foreign subsidiaries; however, this is not our current intent and could be limited by our ability to repatriate such cash in a tax efficient manner. We believe that our existing cash and cash equivalents as of January 31, 2013, anticipated funds generated from our operations, and financing available under our existing credit facilities will be sufficient to fund our operations for at least the next twelve months and repay our subordinated notes due in August 2013. However, in the event that there are changes in our expectations or circumstances, we may need to raise additional funds through public or private debt or sale of equity to fund our operations. Cash balances which are not available for general corporate purposes are classified as restricted cash and are primarily related to cash which collateralizes commercial letters of credit.

Subordinated Notes
We have subordinated notes with a principal value of $10.0 million, accruing interest at 2% annually, for an aggregate amount due of $10.8 million in August 2013. We expect to pay the subordinated notes, and related interest, using cash generated from our operations or from our existing credit facilities.

Credit Facilities
We have a $25.0 million Credit Facility agreement which is scheduled to mature March 2, 2014. Management currently intends to renew the Credit Facility in advance of the maturity date. Under the terms of the Credit Facility in effect as of January 31, 2013, we are required to maintain a maximum consolidated leverage ratio of 2.75x, and a minimum fixed charge coverage ratio of 1.75x. The terms of the Credit Facility define the leverage ratio as the ratio of consolidated indebtedness, excluding our outstanding subordinated notes, to consolidated adjusted Earnings Before Interest, Taxes, Depreciation and Amortization and other non-cash charges, which includes such items as stock-based compensation expense, foreign currency gains or losses, and other allowable add backs pursuant to our Credit Facility Agreement ("Adjusted EBITDA") for the most recent four fiscal quarters. The Fixed Charge Coverage Ratio is defined as the ratio of Adjusted EBITDA, less cash payments for income taxes and maintenance capital expenditures, during the most recent four fiscal quarters to the sum of certain interest charges during the most recent four quarters and scheduled debt repayments in the next four quarters.

The financial covenants are measured on a quarterly basis. Our leverage ratio and fixed charge coverage ratio were 0.74 and 30.3, respectively, as of the fiscal quarter ended January 31, 2013. Our calculations of these financial ratios are reported in Exhibit No. 99.1 of this Quarterly Report on Form 10-Q. A violation of any of the covenants above would result in an event of default and accelerate the repayment of all unpaid principal and interest and the termination of any letters of credit. All of our domestic assets and certain interests in some foreign subsidiaries are pledged as collateral under the three-year Credit Facility Agreement. In addition, the terms of the Credit Facility limit our ability to pay dividends. We were in compliance with all our financial covenants as of January 31, 2013.

Interest on the Credit Facility is based on the bank’s prime rate or LIBOR rate plus a percentage spread between 0.00% and 2.25% depending on whether it uses the bank’s prime rate or LIBOR rate and based on our current leverage ratio. We also pay an annual letter of credit fee ranging from 1.25% to 2.25% of the amount available to be drawn under each outstanding stand-by letter of credit. The annual letter of credit fee is payable quarterly in arrears and varies depending on our leverage ratio.


21

We expect to be in compliance with our covenants pursuant to the Credit Facility Agreement for at least the next twelve months. However, in the event that there is a possibility of default, we may institute cost reductions; raise additional funds through public or private debt or sale of equity; possibly seek amendments to our Credit Facility Agreement or a combination of these items.

There were no outstanding borrowings on our Credit Facility as of January 31, 2013. Consequently, we had $16.9 million available under this Credit Facility, net of $8.1 million in outstanding letters of credit.

We have an unsecured credit facility in Taiwan and there were no outstanding balances under the credit facility as of January 31, 2013. The unsecured commitment for the Taiwan credit facility totaled $1.4 million at January 31, 2013, bearing interest at 2.5% per annum.

Uses of Cash
Capital Expenditures
Our capital spending plans currently provide for outlays of approximately $6 million over the next twelve months, primarily related to investments in machinery and equipment to support manufacturing, other information technology related projects, as well as patent and trademark maintenance. It is expected that funds necessary for these expenditures will be generated internally or from available financing. To the extent that sufficient funds cannot be generated through operations or we are unable to obtain financing on reasonable terms, we may reduce our capital expenditures accordingly. Our capital spending for the nine months ended January 31, 2013 and 2012 was $4.9 million and $3.3 million, respectively.

Repayment of Debt
Our debt primarily consists of our subordinated notes and outstanding borrowings on our Credit Facility. We did not have any borrowings outstanding on our Credit Facility as of January 31, 2013 or April 30, 2012. The subordinated notes, aggregating to $10.8 million of principal and interest are due August 2013. In prior periods we have had balances outstanding, and therefore had net borrowings or repayments in a particular prior year comparative period.

Off-Balance Sheet Arrangements
 We had letter-of-credit agreements totaling $8.1 million as of January 31, 2013 and $4.0 million as of April 30, 2012. These letter-of-credit agreements relate to performance on contracts with our customers.

Contractual Obligations
During the nine months ended January 31, 2013, there were no material changes outside the ordinary course of business in our contractual obligations and minimum commercial commitments as reported in our Annual Report on Form 10-K for the fiscal year ended April 30, 2012.

Critical Accounting Estimates and Judgments
There are no material changes in our critical accounting estimates as disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2012.

Recently Issued Accounting Pronouncements
Not applicable

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have not been any material changes in our market risk during the nine months ended January 31, 2013. For additional information, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations as presented in our Annual Report on Form 10-K for the fiscal year ended April 30, 2012.


22

Item 4. Controls and Procedures

(a)
Evaluation of Disclosure Controls and Procedures

The Company’s management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms relating to the Company, including our consolidated subsidiaries, and was accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b)
Changes in Internal Controls

In connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no change identified in our internal control over financial reporting that occurred during the fiscal quarter ended January 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


23

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

Refer to Note 5 of the Condensed Consolidated Financial Statements found in Item 1 of Part I of this quarterly report on Form 10-Q for a discussion of the Company’s legal proceedings.

Item 1A. Risk Factors

Our business is subject to certain risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our common stock. For a discussion of these risks, please refer to the “Risk Factors” sections of our Annual Report on Form 10-K for the fiscal year ended April 30, 2012, filed by us with the United States Securities and Exchange Commission on June 28, 2012, and our Quarterly Report on Form 10-Q for the quarter ended July 31, 2012 (the "Form 10-Q"), filed by us with the United States Securities and Exchange Commission on August 30, 2012. Other than the risk factor disclosed in the Form 10-Q, there have been no material changes in the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended April 30, 2012.

Items 2, 3, 4, and 5 are None or Not Applicable and have been omitted.




24

Item 6. Exhibits
31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1
Debt Covenant Compliance as of January 31, 2013
101. INS
XBRL Instance Document
101. SCH
XBRL Taxonomy Extension Schema Document
101. CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101. DEF
XBRL Taxonomy Extension Definition Linkbase Document
101. LAB
XBRL Taxonomy Extension Label Linkbase Document
101. PRE
XBRL Taxonomy Extension Presentation Linkbase Document


25

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
FLOW INTERNATIONAL CORPORATION
 
 
 
 
 
Date:
March 12, 2013
/s/ Charles M. Brown  
 
 
 
Charles M. Brown 
 
 
 
President and Chief Executive Officer
(Principal Executive Officer) 
 
 
 
 
 
Date:
March 12, 2013
/s/ Allen M. Hsieh  
 
 
 
Allen M. Hsieh 
 
 
 
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 
 


26

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